Directors of Canadian National Railway Co. have voted to cancel its former chief executive officer’s lucrative retirement benefits, alleging that Hunter Harrison ran afoul of his non-compete pact when he appeared this week at a town hall organized by a U.S. activist investor.

New York-based Pershing Square Capital Management LP, Canadian Pacific Railway Ltd.’s largest shareholder, is waging a proxy contest against CP in an effort to oust CEO Fred Green and replace him with Mr. Harrison, who retired at the end of 2009 from CN.

Railway

In a court filing last month, CN sought a declaration that it is reasonable and lawful for the railway to suspend Mr. Harrison’s pension benefits with a present value of $20.6-million (U.S.) and restricted share units worth $17.9-million.

On Friday, Montreal-based CN’s board of directors turned up the heat further by outright cancelling the retirement benefits.

CN’s board voted unanimously to eliminate Mr. Harrison’s $1.5-million in annual pension payments and “as yet unpaid restricted stock units (RSUs) and other benefits,” CN said in a statement. “Mr. Harrison’s employment agreement with CN requires him ‘not to engage in or in any way be concerned’ with the principal competitor of the company. By virtue of his participation in and public statements at an investor meeting held by Pershing Square Capital Management LP in Toronto on Feb. 6, 2012, and his actions and conduct leading to and associated with that meeting, CN believes Mr. Harrison breached his non-compete and other employment obligations to the company.”

Pershing Square CEO Bill Ackman presented Mr. Harrison to CP shareholders at a meeting in Toronto on Monday, saying his choice to become CP boss has the track record to drive much-needed improvements.

“Mr. Harrison acted in ways that breached his non-compete and other employment obligations to the company despite being advised by CN on Jan. 30, 2012, that such actions, in an effort to install himself as president and chief executive officer of Canadian Pacific Railway Ltd., would prompt CN to cancel, rather than suspend, his pension, RSUs and other benefits,” CN said. “CN has amended its court proceeding in the State of Illinois to obtain a declaration confirming its right to cancel Mr. Harrison’s pension, RSU and other payments and to recover previously paid pension amounts.”

Reached late Friday, Mr. Harrison said: “The court will decide.”

Last month, Mr. Harrison’s lawyer Greg Joseph described CN’s lawsuit as frivolous, saying his client “had a two-year non-compete with CN. He honoured it scrupulously. It expired.”

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